A.M. Best has placed the financial strength rating of A- (Excellent) and the issuer credit rating of “a-” of Gulf Reinsurance Limited (Gulf Re) (United Arab Emirates) under review with negative implications.
The action follows an accepted appeal by Gulf Re where new information was provided outlining enhanced strategic initiatives that are expected to be implemented by the company. The ratings will be reviewed again by the end of November 2014.
The under review with negative implications status reflects the weak technical performance of Gulf Re, coupled with the company’s ability to finalize stronger alignment with its joint shareholder, Arch Capital Group Ltd (ACGL).
Gulf Re’s underwriting performance remains under strain, with technical losses in four out of five full years of operation. The weak performance reflects high expense costs associated with the start-up operation, combined with a higher than expected frequency of large losses in recent years.
Furthermore, Gulf Re has experienced two large claims in 2014, forecasting the loss ratio to rise above 100 percent for the year, which will result in capital and surplus falling below the $200 million with which the company was founded. In response to weakening technical performance, efforts are being made to produce a technical profit in 2015 and reduce underwriting volatility within Gulf Re’s profile.
Further measures enhancing ACGL’s support to Gulf Re are being finalized. These actions include: regulatory approval of board control; an updated stop-loss agreement attaching at a 65 percent loss ratio, effective from January 2015; Gulf Re’s participation in ACGL business through quota-share treaties and a capital injection to return shareholders’ equity above $200 million.
Gulf Re maintains excellent risk-adjusted capitalization benefiting from low underwriting leverage and a conservative investment policy. It also reports low financial leverage and sound liquidity.
Positive rating actions are currently unlikely. Negative rating pressure could result if A.M. Best’s view of the level of support provided by ACGL to Gulf Re changes or if Gulf Re is unable to demonstrate reduced earnings volatility within the technical account.
Source: A.M. Best Europe – Rating Services Limited
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